TheSlayer's Market Thoughts

SPY July 29 2013

The market continued its dithering on Monday, July 29, 2013. Either you view this as "consolidation" or "creeping toward the cliff." What seems most likely is that the major averages will continue with a slight negative bias until the Fed completes its meeting on Wednesday and Fed Chairman Bernanke says whatever he has in mind.

That said, there isn't really much that technical analysis can tell us about going forward. How the market reacts to Bernanke and his crew will determine the next major move. However, if this is a Bull Flag, and it reacts normally, eventually it will resolve higher.

Trading Psychology

It's been interesting the past week watching the changing psychology of traders. It has become cool again to be a Bear, given the market's gains and the recent all-time high. I can see some fear in some traders' posts. That's fine, maybe the fear is justified, the Bears ultimately may be proven right. Beware, however, of mistaking emotion for analysis.

Let me get a bit more specific. When people become worried, some parties who shall remain nameless and faceless are all too happy to feed into that fear. Thus, we see the spectre of "rumors" and "misleading charts and data."

The height of rumor-mongering is when the market is straining, but not quite ready to change direction or continue whatever momentum it has. This is at potential turning points. If you've been around the market long enough, you know that talk of Yahoo! getting taken over has been pulled out by the rumor-mongerers with regularity for years and years. Same thing with rumors of various sorts about Microsoft. Denials follow quickly - right after the Bell. This is usually a way to send the market a bit higher when the rumor-mongers sense hesitation. On the downside, the rumors can involve some kind of shooting at the White House or talk of sovereign downgrades (though nobody seems to care much about those anymore) or, well, pretty much Any Damn Thing.

Which brings up one of my favorite topics: phony charts. If you put something in a fancy graph, it looks so much more official and convincing. However the logic behind some of these charts is often quite shaky.

Yes, here it is again

I mentioned last week my opinion on the use of the "Pro Selling vs. Retail Buying" chart to guide your trading. That chart showed that the pros have been net sellers since December 2012, while retail traders have been buying. Naturally, the chart shows that these pros actually has been selling throughout an epic Bull run. A Twitter follower mentioned, in the pros' defense, that it takes a long time for the pros to liquidate their large positions, so the fact that they have been net sellers ALL YEAR is justifiable.

Perhaps. But my response to him and you is that, if the pros require that much lead time, relying on them for any kind of short-term guidance is pointless and counter-productive. Today, I heard a variation of that statistic: that "the pros have sold more stock to retail in the last four weeks than at any time in history" (I think that was the headline). Well, if that's true, they missed an all-time high and will have to do something before the end of the month to show their clients that they actually have some positions and aren't just twiddling their thumbs with their clients' money. Let's see how that works out for them.

Another old chestnut of a chart keeps popping up, and we might as well address it: the old Margin Debt chart.

Margin Debt vs. S&P 500, 1999-2013

You will hear the cry, "Margin debt is at an all-time high! That means the market must crack soon!"

Perhaps. That's always possible. The market could crack at any time, as we keep saying over and over. And it's undeniable - margin debt is up there, and when the market has trouble, those margin buyers must liquidate, or be liquidated. So, yes, this could mean... something.

But what, exactly? If you look at the chart, not just at the current high levels but the whole chart, you'll notice something that the Bear hypesters aren't mentioning: the margin debt levels simply track the market. Yes, folks, when the market goes up, so do margin debt levels. When the market goes down, the margin debt levels go down. The only truly interesting thing about this chart is that it shows that margin debt seems to fall more during down periods than you might think, then accelerates during up-turns. Margin debt serves as a sort of accelerator. But using it as a predictor? The margin debt tends to top with the market, and bottom with the market. So there's really not much predictive power there.

If the Margin Debt starts to tank, then you might get a little more Bearish, but as far as I'm aware, that hasn't happened. Margin Debt is simply tracking the market higher, and yes, it is high, but that is simply because the market is high. It's kind of funny hearing the suggestion that you should sell because margin debt is high and rising - when it's exactly the reverse: you should sell when margin debt is low and falling. Just look at the chart!

If you are basing a decision to sell on that chart, you might as well just say, "Well, the market is up, so I might as well sell." There's nothing more to this "analysis" than that. And that might be a valid reason to sell, but it isn't based on anything Margin Debt is doing or saying.

I realize that some of you might think this is simply me trying to talk you into something. I'm not. I present these charts in part to make the Bears' case for them. You have the charts in front of you - it is up to you what you make of them.

What I am pointing out, however, is that these same old chestnut charts and ideas get pulled out at the same old times, but they don't really say anything meaningful. They simply feed into your existing Bullishness or Bearishness. Make up your own mind.